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THE GREAT RECESSION 2008 - 2009

WHAT IS RECESSION
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A Recession is a contraction phase of the business cycle. According to National Bureau of Economic Research (NBER) – “significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. Decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year . In economics, a recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions.

WHAT CAUSES RECESSION
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Primarily caused by the actions taken to control the money supply in the economy. When the consumer faces foreclosure and the banker comes knocking for his pound of flesh. Companies and whole countries go bankrupt for want of liquid funds and cash flow for even daily requirements. Currency crisis Energy crisis Under consumption Overproduction Financial crisis Price of Fuels

United States housing market correction (a consequence of United States housing bubbles) and sub prime mortgage crisis. US economy accounts for 30 per cent of the world's GDP. The value of houses dropping and the pension savings decimated on the stock market. Protracted credit crisis and "rampant inflation in commodities such as oil, food and steel." The 6.4% decline in spending during Q3 on non-durable goods, like clothing and food, was the largest since 1950. Increasing inflation led to higher interest rate.
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As a result borrowing loans and consumer spending stopped. People having low credit profile became defaulters. Easy liquidity started vanishing.

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US shares fell into the red from their early gains after the NBER announcement.

SUBPRIME CRISIS
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Involves financial institutions providing credit to borrowers who do not meet prime underwriting guidelines. Sub prime borrowers have a heightened perceived risk of default. – such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience.

UNITED STATES ECONOMIC RECESSION HISTORY
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The United States has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. The US economy has suffered 10 recessions since the end of World War II, the last of which was in March 1991.

Crisis in the U.S.
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The defaults on sub-prime mortgages (home loan defaults)
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Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes.

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Major Banks have landed in trouble after people could not pay back loans. The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This coupled with rising oil prices slowed down the growth of the economy.

FACTORS CAUSING ECONOMY TO FALL INTO RECESSION
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Rising inflationary environment. People tend to cut out leisure spending, reduce overall spending and begin to save more. Individuals and businesses curtail expenditures in an effort to trim costs. – causing GDP to decline. Layoffs and Unemployment. Huge losses in financial sector. Shrinking domestic demand and falling asset prices. Relaxed policies in lending practices making it extremely easy to borrow money during inflationary environment resulted in unsustainable economic activity and the economy coming to a near halt.

According to Bruce Kasman (chief economist at JP Morgan, New York) - "A return to growth in the second half of the year is not equal to a return to health.” Since US is one of the major super powers, a recession–mild or deeper will have eventual global consequences. USA may cut their capital investments into the country if they have to control recession at their end. Till the stocks didn’t climb upwards chances were that investors will loose more money. Any significant slowdown in U.S. economy is bound to have reverberations elsewhere. Banks who lend money in a big way have got huge holes in their lockers.
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Bankers like Lehman Brothers have been sucked in to a black hole already.